Gambling
Gambling Income and Expenses
Gambling winnings are fully taxable and must be reported on your tax return. You must file Form 1040 (PDF) and include all of your winnings on line 21. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. For additional information, refer to Publication 525, Taxable and Nontaxable Income.
A payer is required to issue you a Form W-2G (PDF) if you receive $600 or more in gambling winnings or if you have any gambling winnings subject to Federal income tax withholding. The $600 amount is increased to $ 1,200 for winnings from bingo or slot machines and to $ 1,500 for winning from Keno. If you have won more than $5,000, the payer generally is required to withhold 25% of the proceeds for Federal Income Tax. If you did not provide your social security number the payer may have to withhold 28%. For more information on withholding, refer to Publication 505, Tax Withholding and Estimated Tax.
Per IRC Sec. 165(d) you may deduct gambling losses only if you itemize deductions and only to the extent of the gains from such transactions. (This was formerly Sec. 23(h) of IRC of 1934. You may need to know this for legal research. Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A (PDF), line 27. This bifurcation results in the “Gambler’s AGI Penalty.”
There is much confusion regarding how to report gambling transactions; i.e. should transactions be reported based on each pull of the slot machine, roll of the dice, and draw of the card. Conversely, should gamblers simply report the “net amount for the year?” The courts and IRS have said no. Instead the courts and IRS have developed the concept of the “Gambling Session.” Gamblers should report the total of all “winning” gambling sessions on Form 1040, Page 1, Line 21. Gamblers should report all “losing” gambling sessions on Schedule A, Other Miscellaneous Deductions as “Gambling Losses to the Extent of Gambling Winnings.” Many glossary terms used in reporting gambling winnings and losses have very specific meanings as they pertain to reporting. Preparers should be familiar with these glossary terms.
It is important to keep an accurate diary or similar record of your gambling winnings and losses. There are many unfortunate myths surrounding the documentation required to deduct gambling losses. According to Rev. Proc. 77-29 gamblers must keep a diary that shows 1) the date & type of wager, 2) the name of the gambling establishment, 3) the address of the gambling estabishment, 4) the name of any other persons present at the time, and 5) the amount won or lost. Related court cases shed additional light on how the courts and IRS have interpreted Sec. 165(d)
Refer to Publication 529, Miscellaneous Deductions, for more information.
Description and Definition of Gambling Income and Losses
Income and losses from gambling, such as lotteries, bingo, and racing. Even if your wager was illegal the winnings are taxable. Gambling losses are only deductible to the extent that you report gambling income for the tax year.
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